2021 ESTIMATED Social Security Inflation Adjustment: 1.0 - 1.4%
Each fall after the release of September CPI data the inflation adjustment for Social Security benefits is finalized. Around that time the maximum salary subject to Social Security payroll taxes is also determined (based on a different index). The final CPI-W data point will be released October 13th but with 2 of the 3 data points known, an early estimate can be calculated. It is likely the increase for benefits will be between 1.0 – 1.4% depending on the index change for September. The Medicare premiums for 2021 have not been released yet but expect an increase. The net benefit hitting your bank accounts is then the increased gross benefit less any Medicare premiums deducted and income tax withholdings.
The graphic below shows the steps to calculate the inflation adjustment and a graph of actual increases over the past 20 years. The 1.2% approximation assumes the September CPI-W data point will not increase. If there is a relatively large monthly change in September based on the last three months change of +/- 0.55%, the annual increase will range from 1.0% - 1.4%.
Note the inflation index used for Social Security is the non-seasonally adjusted index for wage earners (CPI-W), not the more common seasonally adjusted index for all urban consumers (CPI-U) reported in the media. There is also a research price index called R-CPI-E which captures the common basket of goods and services for those age 62+. There are years when these indices can diverge significantly, mostly in years when headline inflation deviates from the long-run average. Last September the R-CPI-E was 0.35% higher; this year it is less than 0.10% higher. The graph below shows these indices over the past ten years (Note: shaded area is for recession). The common CPI inflation number in the news every month is the red line.
For those working and paying into Social Security (6.2% payroll tax for SS on wages up to $137,700 for 2020), the estimated increase in wages subject to this tax is based on a different index – the ‘national average wage index’. I do not have an estimate based on this index at this time. Recall there is an additional 1.45% payroll tax for Medicare that is applied to all wages (not capped), plus an additional 0.9% on earnings above $200,000 for individuals and $250,000 if married filing jointly (NOT indexed to inflation). Your employer also pays these taxes (or you if self-employed), except the extra 0.90%. For those interested in a deeper dive, see my blog post on Social Security and Medicare Financial Overview.
Watch for the final inflation adjustments after the October 13th CPI-W reading.
Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com